Raising revenues through carbon pricing can help improve energy affordability

11/05/2017 – Well designed carbon pricing reforms can tackle catastrophic climate risks, such as storms and floods, while improving the affordability of energy for the poor.

Carbon pricing reforms that cut CO2 emissions mean higher energy prices, which is a particular threat to poor households as they typically spend a large share of their income on energy bills. However, energy affordability for poor households can be increased by well-designed carbon pricing reforms. A new OECD report out today reveals that transferring a third of the additional revenues from an energy pricing reform to poor households would be sufficient to increase their ability to pay for their energy needs.

The impact of energy taxes on the affordability of domestic energy uses household level data covering 20 OECD countries to analyse energy affordability at current energy prices and explores how these indicators change in response to a simulated energy tax reform. The report finds that higher energy prices, needed to cut harmful carbon emissions and air pollution, can also help achieve social policy objectives.

The share of households that face energy affordability risks differs widely across countries, from less than 3% in Switzerland to more than 20% in Hungary, with the average around 8%. Energy affordability is less often a problem in higher income countries, though the report finds that there is no apparent relationship between energy affordability and energy prices or taxes.

The simulated energy tax reform presented in this report aligns prices with environmental objectives by increasing taxes on domestic energy use to EUR 45 per tonne of CO2 and EUR 1 per GJ. This increases energy prices by 11.4% on average for electricity, 15.8% for natural gas, and 5.5% for heating oil. The report finds that transferring a third of the additional revenues resulting from this reform to poor households, by means of an income-tested cash transfer, is sufficient to improve energy affordability across the 20 countries analysed in this report. To this end, energy affordability risks would decline by more than 10% on average across all countries considered.

“Energy affordability risk is a serious problem in many OECD countries”, said Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration. “Higher energy taxes are a good tool to avert catastrophic climate risks and curb air pollution. Good policy design and the wise use of the additional revenues raised can help improve energy affordability for vulnerable households.”

For more information, journalists should contact Kurt Van Dender (+33-1 45 24 88 66), Head of the Tax and Environment Unit or Florens Flues (+33-1 45 24 83 69), Economist, from the OECD’s Centre for Tax Policy and Administration.